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Prof. David Robertson introduced the THINK audience how Lego rewrote the rules of innovation.

When we think of Lego, we envision financial success and dramatic innovation. On the surface, or so it seemed, the Lego Group had done everything right for many decades.

The company was an iconic name in the toy business — plastic building-block toys were Legos in customers’ minds. Lego was also rare among big companies in that the firm was still run by the founding family, with Christiansen’s grandson Kjeld Kirk serving as CEO. While Lego had always looked for new products, after a sales slump in 1993, the firm tripled its offerings and in 2000 went on a binge of innovation, adding on Lego-branded electronics, amusement parks, interactive video games, jewelry, education centers and alliances with the Harry Potter franchise and the Star Wars movies.

Kjeld Kirk Christiansen and his leadership team adhered to nearly every one of the major principles that are widely prescribed by experts in launching its spate of innovation in 2000: the firm found relatively competition-free markets where Lego could dominate; management sought the participation of a number of different constituencies from both inside and outside the firm and hired a diverse and creative staff; it tried to create new products that disrupted existing markets; and it listened to customer feedback. Innovation became a focus of every aspect of the company, with the goal of turning it into the world’s strongest brand among families by 2005.

In short, Lego had created an innovative culture that seemingly would have been the envy of any firm. “Lego followed all the advice of the experts,” said Robertson. “And yet it almost went bankrupt.” The Lego story, according to Robertson, lies at the heart of why companies should not blindly follow the typical mantras of innovation. Management and evaluation must be at the heart of any innovation strategy, he noted, and although it is generally not good for a firm to remain stagnant, the reality is that unbridled innovation in the vein of Lego may not be the answer, either.

By 2003, the company was virtually out of cash. It lost $300 million that year, and the projected loss for the next year was up to $400 million. “Basically, Lego had strapped on wings and was flying at 30,000 feet,” Robertson noted. But the company had not asked or answered the questions needed to financially sustain such growth — questions such as where do you want to go, where are you now and how will you get there? “If you are going to accelerate innovation, you need to know which way you are going,” Robertson said.

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Christiansen ultimately stepped aside, becoming chairman and letting Knudstorp take the role of CEO. To generate cash for its next phase, the company sold a 70% stake in its successful Legoland theme parks for $460 million to the Blackstone Group and closed the firm’s Danish headquarters building, moving management into a nearby factory. It then outsourced the overwhelming majority of its plastic-brick production to cheaper facilities in Mexico and the Czech Republic.

The new regime at Lego, however, did not just throw over innovation, said Robertson. Instead, it created a more organized structure for those efforts. Management gave everyone from the sales force to the headquarters staff the capability to create and suggest new avenues for growth. But their ideas were put to the test: any innovation had to prove to be consistent with the company goal of Lego being recognized as the best company for family products.

For instance, experts generally suggest that innovation should move toward “blue oceans,” that is, markets where the product will be unique. But as Robertson noted, “red oceans” — meaning that blood could be in the waters from competitive sharks — exist for a reason. “People are competing in red oceans because there is something there worth going after.” The company sought to compete with Lego-like toys in three dimensions and on video. It opened retail stores and created Lego-themed board games and straight-to-DVD films.

While the company may no longer be flying loop-the-loops at 30,000 feet, it is no longer susceptible to crashing and is cruising along again as one of the more successful toy companies, according to Robertson. By managing its innovative tendencies, over the past three years, Lego’s sales have gone up an average of 24% annually and profits have grown by 41%, he added. The company now has about 10,000 employees and is the world’s third largest manufacturer of play materials. Lego products can be found in more than 130 countries.

Lego may not regularly make lists of the most innovative companies, but it is moving forward at a time when competitors such as Hasbro and Mattel are stagnating, Robertson noted. “Controlled innovation has clearly worked. That is the lesson learned at Lego — just in time.”